3 tech stocks facing the blue screen of death

The post-PC era does not bode well for these aging companies.

By InvestorPlace Nov 15, 2012 1:11PM

Image, Computer error copyright Digital Vision, Digital Vision Ltd.By Jeff Reeves

iplogoFor the record, I do not believe that PCs are going to disappear forever. While there is a great deal of growth in mobile and a need to embrace cloud computing, there still is a lot of money to be made in desktops and laptops.

However, it's clear that the PC pie is shrinking -- and since growth is the name of the game, companies that have failed to develop alternative revenue streams or increase their reach are doomed to decline.

You know some of the biggest players in mobile: Apple (AAPL), Google (GOOG) and Samsung (SSNLF) to name a few. But let's look at the other side of the coin, some of the biggest flops in the PC arena, namely: Hewlett-Packard (HPQ), Seagate Technology (STX) and Advanced Micro Devices (AMD).

Here are the reasons why I think these stocks are about to see the blue screen of death:

Advanced Micro Devices

5-Year Return: -85% vs. -9% for the S&P 500
YTD Return:
-64% vs. 11% for the S&P 500

Full disclosure: I am not a super bear on the entire old-guard chip industry. I actually just bought into Intel (INTC) and recently and made my case for the stock in this article.

However, two of my main reasons for investing in Intel -- the nice dividend and the mammoth scale to provide stability -- are decidedly lacking from Advanced Micro Devices.

AMD didn't even crack the top 10 of semiconductor market share with a mere 2.1% reach, according to a March report from industry analyst iSuppli -- compared with a mammoth 15.6% share for Intel in the top spot.

Furthermore, AMD doesn't pay a penny in dividends. So much for stability there.

AMD isn't just a sitting duck, of course. Its Hondo mobile processor holds promise, if it can gain traction. However, Intel has the power of scale and dominance, and can keep driving down pricing to punish AMD on the margins, even if its products are good. The result is a challenging environment where secular trends are weighing on the business, margins are razor-thin thanks to Intel's browbeating on prices, and the company is struggling to simply keep its head above water.

Here's where we get to the biggest problem of all: Right now, AMD actually is operating at a loss and is projected to lose money again in 2013. The company recently unveiled plans to eliminate 15% of its work force, or about 1,800 jobs, according to AllThingsD, to deal with the cash crunch.

It's a sad state of affairs when you're a laggard in your sector, the sector in general is declining and you don't have a significant cash cushion should the tough times continue.

I wouldn't mess around with AMD at all. There's a very good chance that this stock won't be around at all in the next year or two.


5-Year Return: -73%

YTD Return: -49%

Those of you who thought it was impossible for Hewlett-Packard to go any lower have been forced with an ugly reality in 2012: The bottom has not been reached, and it could be a lot further down in the near future based on recent information.

Consider that HP has suffered four straight quarters of year-over-year revenue declines. Consider that in Q3, it posted its worst quarterly loss in the history of the company, thanks to mammoth writedowns associated with restructurings and botched buyouts. Consider that even if you exclude one-time charges, profits fell 9% year-over-year anyway. And it cut its 2013 guidance to boot.

Most importantly, consider that Meg Whitman called an analyst event in October that was simply designed to plead for patience and tout a snail's-pace turnaround that wouldn't get HPQ poised for growth until 2014 -- and only then if all the cards fell right.

Sure, HP has a 4% dividend yield that is very sustainable, but that's not enough of a reason to buy. This is a company that has wasted the past five years on musical chairs in the corner office and multiple failures in product development.

The PC and printer business at HP is slowly declining both nominally and on a market-share basis -- Hong Kong's Lenovo (LNVGY) just overtook HP as the world's top PC maker -- and there's nothing to replace that lost revenue. Whitman hopes enterprise software will pick up the slack, but competing with the likes of Oracle (ORCL), Cisco (CSCO), Juniper (JNPR) and other entrenched names will be no easy task.

HP won't disappear anytime soon with $9.9 billion in gross cash in the bank as of last quarter. But if this is its grand vision, investors are better served looking elsewhere in tech.

Seagate Technology

5-Year Return: -1%

YTD Return: +63%

Don't let Seagate Technology fool you with its outperformance. This stock has been a big momentum play in 2012, but that ride is about to come crashing to a halt for two reasons.

In the short-term, the easy year-over-year comparisons due to supply chain disruption in 2011 are ending. In the long-term, this disk drive stock will come to grips with the secular reality of a post-PC age and the rise of flash memory technology.

Consider that in its most recent quarter, Seagate reported earnings per share of $1.45 -- far short of the $1.67 forecast. And the only reason sales didn't disappoint was because the guidance was lowered in advance of the report. Margins were soft, enterprise sales were weak and that old boogeyman of "global macroeconomic uncertainty" was blamed for sapping momentum. Seagate actually is off 20% in the past three months as a result.

The hard reality is that Seagate stepped over some very low bars earlier in the year thanks to supply chain disruption in 2011 caused by flooding in Thailand. The result was better margins, some pent-up demand and easier year-over-year comparisons. This lulled some folks into a false sense of security -- sending shares up 240% from lows in September 2011 to this year's peak back in May.

That clearly was overly optimistic, and now the fundamentals are deteriorating. Margins are soft, the total available market is stagnant at best, and competitor Western Digital (WDC) has eaten into some of Seagate's market share, according to ZDNet. 

Long-term, the growth of hard disk sales is going to be much harder to come by. As with HP, you have a nice dividend in STX right now (4.5%) and a pretty solid balance sheet. This company won't evaporate in 2013, but it won't deliver big gains, either.

Seagate is moving onto new things, to be sure. The company plans to introduce new enterprise and ultra-thin hybrid hard drives going forward and wants to get into solid state disk drives more ambitiously. But whether those efforts come to fruition in time to help out current investors is doubtful.

If you haven't cashed out of Seagate yet, do so before the music stops and the company makes another leg down.

Jeff Reeves is the editor of InvestorPlace.com and the author of "The Frugal Investor's Guide to Finding Great Stocks." Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in Apple but none of the other stocks named here.

More from InvestorPlace

Nov 15, 2012 2:26PM

How come we are getting articles like this today on MSN, and not one mention of the jobs numbers? Gee, I wonder why that is?


Okay, I have to modify the above comment.  There was one article about the numbers.  But it wasn't listed on the MSN home page this morning.  I had to go looking for it.  That wasn't the case before the election when the media was shouting from the rooftops how greatly the economy was improving.  After the election?  Hhhhmm, now you have to go find that number.  So, I have to retract my comment about not one mention.  There was indeed an article, but it is still pretty clear that MSN wasn't as nearly as enthusiatic about putting the story out front as they were before the election.

Nov 15, 2012 1:42PM

For the record, I do not believe that PCs are going to disappear forever. Correct, however smart phones and tablets are PC's too so the PC market is actually growing by about 10-20% per year.


Agree on AMD. However, HP has the resources and time to correct their Palm mistakes if they build the correct Windows 8 devices.  They'll never do that if the likes of Mr. Bradley, HP's VP PC's, doesn't stop throwing stones at Microsoft's Surface and instead starts building competitive devices like Aus Vivotab, Dell XPS 10 and Lenovo Yoga.




Nov 15, 2012 4:20PM
"A need to embrace cloud computing". Is this statement an implication that cloud services such as backups and enterprise applications like accounting and CRM are not taking off like a lot of folks thought they would? I wonder why, lets see. What happens if a cloud service for your data backups experiences catastrophic infrastructure failure? Or something less catastrophic such as the Internet goes down on one end or both ends? What happens if the cloud service goes belly up (It's already happened)? And, let us not forget that data stored in a cloud service is yet one more place where confidential corporate data can potentially be compromised by other eyes. I don't think in- house client/server applications and hardware are going to go away anytime soon.
Nov 16, 2012 5:16PM

What so many seem to fail to understand (refuse to understand) is that the HDD industry is NOT about unit growth. It is about data growth. And whether the PC market stagnates, declines or even goes away with respect to HDD usage, it does nothing to slow the never ending growth of data. Further, the greatest source of data (for the cloud) will come from today's consumer devices; phones, tablets, etc. It is impractical to store all that data locally so it will go into the cloud. And as bandwidth improves, more and more data will move to the cloud. Now, as to the impact that has on HDD companies? It is a home run. Trading a 500GB Client-class HDD for a 4TB Enterprise-class HDD is a pretty big step up in ASP. And since this will occur over many years (no step functions projected), the impact will be tame overall HDD unit growth, strong overall HDD revenue growth and unfettered HDD-stored data growth.


So, does someone really want to explain why a company like WD (or STX for that matter) has a forward multiple of less than 4! Insane. But unfortunately encouraged by the continued lack of fundamental understand of how the data storage world (according to the HDD) actually works.

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